Citi Investment Research Recommends to SELL SESA GOA with target of 145/- (August 29 2008)

Citi Investment Research Recommends to SELL SESA GOA with target of 145/- (August 29 2008)

Price (29 Aug 08) Rs158.25
Expected share price return -8.4%
Expected dividend yield 3.2%
Expected total return -5.2%
Market Cap Rs124,581M
US$2,850M

Citi Investment Research Target price at Rs145 — Sesa Goa is fundamentally well positioned in the iron ore industry, but we believe most positive triggers are already priced in. We expect future iron ore price hikes to be substantially lower relative to FY09 and risks of government intervention remain. Our target price is based on SOTP with DCF value of Rs142 for Sesa Goa, implying a 12-m forward PE of 3.8x.

Rs61/sh is cash — Cash adj PE is 2.3x. Though low, we think it is justified as the relative value from the core business should show declining trend. The high cash level provides a stock price floor, but makes it relatively less responsive to ore prices. Earnings are quite sensitive to regulatory factors. If contract prices
rise 40% (vs 30%), FY10E PAT is 8% higher. Royalty at 10% cuts PAT by 19%.